--Clyde Russell is a Reuters market analyst. The viewsexpressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, April 5 (Reuters) - Is Australiaprepared to see all its ageing oil refineries closed down in theface of Asian competition or should the industry be deemedstrategic and eligible for government protection?
That's the question that should be asked after Thursday'sannouncement by Royal Dutch Shell that it would closeits Geelong refinery in Victoria state and convert it to animport terminal if a buyer couldn't be found.
Given the parlous state of Australia's refining industry, itseems closure and conversion is a far more likely outcome forthe 55-year-old plant, which can process 120,000 barrels per day(bpd).
If it does close, Geelong will be the fourth refinery toshut since 2003, reducing Australia's capacity by about 40percent to just 408,600 bpd by 2015.
The country consumed about 1 million bpd of crude in 2011,according to BP's Statistical Review of World Energy.
This means that if Geelong does close, domestic refinerieswill be able to meet only 40 percent of 2011 demand levels, andlikely considerably less of 2015 demand as consumption isexpanding given the heavy use of diesel in remote miningoperations.
Shell has already closed the Clyde refinery in Sydney, a90,000-bpd plant that was the nation's oldest and is now animport terminal.
A similar fate awaits Sydney's other refinery at Kurnell,with owner Caltex Australia planning to convert the124,500 bpd plant to an import terminal by the second half ofnext year.
Exxon Mobil's Port Stanvac refinery in Adelaidestopped processing in 2003 and started complete demolition lastyear, thus ending any chance of its revival.
This leaves BP Plc's two plants, at Kwinana south ofPerth and in Brisbane, Caltex's Lytton plant in Brisbane andExxon's Altona operation in Melbourne as refineries that maystill be operating by 2015.
The problem for all of these plants is their age and theneed for significant investment for them to remain competitivewith the complex, export-orientated refineries in India andSingapore, as well as the likelihood of increased Chineseexports of refined products.
BP's 140,000-bpd Kwinana plant, the nation's largest, wascommissioned in 1955 and its 90,000-bpd Brisbane operation in1965.
Caltex's 108,60-bpd Brisbane refinery started in 1965 andExxon's 80,000-bpd Altona plant commenced operations in 1955.
This means the youngest plants in Australia are about 48years old, and while they have undergone regular upgrading, theyare likely no match for the new mega-plants such as RelianceIndustries two refineries at Jamnagar on India's west coast,which have a combined capacity of more than 1.2 million bpd.
Although both BP and Exxon maintain they are committed tokeeping their plants operating, it does appear that the oilmajors would be willing to explore options for their Australiandownstream operations.
An Exxon executive, who declined to be identified as he isnot authorised to speak to the media, told me they would love tosell the Altona refinery, but there aren't any suitable buyersaround.
It's entirely possible that Australia could meet all of itsfuel needs from imports, but the question has to be askedwhether this is a good idea.
The obvious risk is geopolitical, with any crisis affectingsea lanes such as the Straits of Malacca outside Singaporelikely to have an immediate impact on fuel availability.
Once refineries are closed and converted to importterminals, they can't be rushed back into service in the eventsomething goes wrong and building a new one would likely taketoo long in the event of a genuine regional crisis.
So far the government of Prime Minister Julia Gillard seemsquite sanguine about the refinery closures, with what littleconcern expressed being more about the loss of jobs than energysecurity.
Former Energy Minister Martin Ferguson, who resigned lastmonth after siding with attempts to replace Gillard with heraxed predecessor Kevin Rudd, said at the time of theannouncement of the closure of the Kurnell refinery that therewas no threat to the nation's fuel supplies.
If Geelong does close, and the threats of closure over otherrefineries come to fruition, it's hard to see how the governmentcould remain so ambivalent about energy security.
There was public concern when Singapore Telecommunicationsbought the number two Australian mobile phone operator Optus in2001 amid fears that a strategic asset was falling into overseashands.
Imagine the concern when the public realises that they arereliant on refineries in Singapore for their petrol, and if thetaps are turned off, Australia would have few options to securesupplies short of launching military action.
Does this mean the government should be subsidising oilrefineries similar to what they do for the car manufacturingindustry?
The government has in fact added to the burden of domesticrefineries by subjecting them to the carbon tax, which doesn'taffect their offshore competitors.
The car industry has received almost A$4.5 billion ($4.3billion) in assistance in the past 10 years, split between thethree local manufacturers, namely General Motors' Holden unit,Ford and Toyota.
While politicians from both the ruling Labor Party and theopposition Liberal Party talk up the benefits of having a carindustry, the real motivator is keeping manufacturing jobs alivein an increasingly globalised industry.
In many ways refining is far more sensible an industry tosubsidise given its strategic nature, and any assistance couldbe tied to commitments to upgrade and modernise the facilitiesto give them a fighting chance against regional competitors.
However, politicians rarely act until the crisis is real orperceived as such by the voting public, so the refining industrywill have its work cut out trying to get something from thegovernment, especially with a federal election due in September.
The refiners will also have to figure out for themselveswhether they are in Australian downstream operations for thelong haul or whether they want to exit.
BP (BP.)
